The opinion
T.C. Summary Opinion 2007-141
UNITED STATES TAX COURT
WILLIAM W. BROWN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6899-06S. Filed August 14, 2007.
William W. Brown, pro se.
Kathleen K. Raup, for respondent.
RUWE, Judge: This case was heard pursuant to the provisions
of section 74631 of the Internal Revenue Code in effect when the
petition was filed. Pursuant to section 7463(b), the decision to
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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be entered is not reviewable by any other court, and this opinion
shall not be treated as precedent for any other case.
Respondent determined a deficiency in Federal income tax of
$3,169 for petitioner’s 2001 tax year. After concessions,2 the
issue we must decide is whether petitioner is entitled to deduct
payments totaling $3,484.16 toward the principal of an
outstanding debt reported on his Schedule C, Profit or Loss From
Business.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated by this reference. When the petition was filed,
petitioner resided in Egg Harbor Township, New Jersey.
Petitioner has been a residential home builder since 1985.
On December 22, 1988, petitioner purchased five vacant lots
(lots) in Egg Harbor Township, New Jersey, for $162,500. In
order to pay for the lots, petitioner borrowed $182,500 from
2
Respondent concedes that petitioner is entitled to deduct
$8,515.84 for mortgage interest reported on his Schedule C. The
parties stipulate that petitioner is not entitled to a deduction
for mortgage interest reported on his Schedule A, Itemized
Deductions, but he is entitled to the $6,550 standard deduction
for 2001. The parties also agree that petitioner is entitled to
a Schedule C business deduction of $2,033, instead of the claimed
$984, for business use of home and a lifetime learning credit of
$716, instead of the claimed $223, for 2001. Whether petitioner
is liable for additional self-employment tax or entitled to an
earned income credit for 2001 are computational adjustments that
will need to be made in the parties’ Rule 155 computations.
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Anchor Savings and Loan Association (Anchor), gave a mortgage on
the lots, and a second mortgage on his home, as security (entire
transaction hereinafter referred to as the “loan”). According to
the loan commitment letter, $20,000 of the amount borrowed was to
be placed into a passbook savings account at Anchor as an
interest reserve.
In 1990, petitioner completed a home on one of the lots, and
in 1991, he sold a partially completed home on another one of the
lots. Before 1999, petitioner sold all of the lots that had
secured repayment of the loan.
During 1994 and 1995, Anchor was placed in receivership by
the Resolution Trust Corporation, and petitioner’s loan was
subsequently sold to Federal Financial Co. On March 15, 1999,
petitioner and Federal Financial Co. executed a modification
agreement whereby petitioner agreed to repay the outstanding
indebtedness of the loan, $100,353.38, at a 9-percent interest
rate over 84 months. Pursuant to the terms of the modification
agreement, petitioner was required to make $1,000 monthly
payments, each payment consisting of principal and interest.
Pursuant to the modification agreement, petitioner made 12
monthly payments of $1,000 toward the loan to Federal Financial
Co. in 2001. Of the $12,000 paid, $8,515.64 was applied to
interest and $3,484.16 was applied to the principal of the loan.
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Petitioner timely filed a 2001 Federal income tax return.
On August 13, 2003, respondent mailed a notice of deficiency to
petitioner with respect to the 2001 tax year. Petitioner timely
filed a petition on April 10, 2006.3
Discussion
Based on the foregoing facts, which are not in dispute,
petitioner argues that the portion of his loan payments
applicable to the principal should be deductible as a business
expense. Respondent argues that to allow petitioner a deduction
for repayment of the principal on the loan would essentially
allow a “double deduction”. Respondent argues that petitioner
used the loan to purchase the lots and established petitioner’s
tax basis in them. Respondent notes that each of the five lots
that secured the loan was sold before 2001, and that any gain or
loss on the sale of those lots should or could have already been
reported on petitioner’s returns for years before 2001.
Summarily, respondent’s argument is that petitioner has, or could
have, already recovered the cost of the lots when they were sold,
3
Petitioner filed a ch. 13 petition in the U.S. Bankruptcy
Court for the District of New Jersey on Sept. 5, 2000. In 2000,
the filing of a ch. 13 petition triggered an automatic stay which
prohibits the commencement of a proceeding in the Tax Court
concerning the debtor. See 11 U.S.C. sec. 362(a)(8) (2000). The
automatic stay was lifted on Jan. 10, 2006, when the bankruptcy
court entered an order granting petitioner a discharge under ch.
13 of the Bankruptcy Code. Due to the automatic stay, the
running of the time for petitioner to file a petition in this
Court was suspended, which allowed him to file a timely petition
after the discharge from bankruptcy. See sec. 6213(f)(1).
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and that the deduction of the principal of the loan would
effectively duplicate a tax benefit to petitioner. We agree with
respondent’s argument.
After borrowing the funds, petitioner used the proceeds to
purchase lots. The borrowed funds used for the purchase created
a tax basis. The subsequent sale of the lots resulted in either
a profit or loss. At trial, petitioner acknowledged that he
would have reported any gain from the sale of the lots in prior
years by subtracting his cost from the sales price. If
petitioner had suffered a loss, he could have offset other
income.
Regardless of whether petitioner had a gain or loss on the
sale of the lots, the tax benefit of the cost incurred in
purchasing the lots would have been realized in the year of sale.
The repayment of the loan’s principal is a different transaction
from the purchase and sale of the lots and does not create a
deductible business expense. Petitioner was simply returning
borrowed money. See Brenner v. Commissioner, 62 T.C. 878, 883
(1974); Crawford v. Commissioner, 11 B.T.A. 1299, 1302 (1928).
Therefore, we sustain respondent’s determination that petitioner
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is not entitled to a deduction for the repayment of principal on
the loan.
To reflect the foregoing,
Decision will be entered
under Rule 155.